Deal Structures
Same headline price, very different outcomes. Buyers love when sellers obsess over the number and ignore the structures beneath it — that’s where the real money is lost or kept. Every deal structure can shift leverage. Know how.
A big number on an LOI means nothing if the structure quietly shifts risk back onto you. These are the hidden levers buyers use to win — and the ones you must understand if you want to keep what you’re promised.
1. Earnouts
Definition: A portion of the price is paid only if the business hits certain performance targets after the sale. Earnouts are common when buyer and seller forecasts differ — the buyer doesn’t fully trust your projections, so they “bridge the gap” by making part of the payout contingent.
When It Makes Sense: An earnout can work when there’s a clear, objective metric — like hitting a contract milestone or revenue target — that both sides can measure fairly. It’s best when tied to something within your continued influence if you’re staying involved.
Trade-Off: Earnouts shift performance risk onto you long after you lose operational control. Buyers can starve the business, bury expenses, or change direction. A “big” earnout on paper is worthless if you’re expected to deliver results under someone else’s management — especially when you no longer steer the ship.
2. Equity Roll
Definition: Part of your payout comes as shares in the buyer’s company — a non-cash form of capital. You’re swapping cash today for a stake in the buyer’s future upside.
When It Makes Sense: A roll makes sense when you trust the buyer’s strategy, believe your company will boost their overall value, and can afford to ride a second exit for more upside. It’s often smart for sellers who want to stay involved and share in that growth.
Trade-Off: You trade cash certainty for alignment risk, market risk, and governance headaches. PE firms can over-leverage or re-sell on terms you don’t control. A “second bite at the apple” sounds good — until you see how easily your new shares can get diluted or repriced.
3. Seller Financing
Definition: You act as the bank — financing part of the sale price through a note paid over time. This is common in lower middle market deals or when lenders need a seller note to get comfortable.
When It Makes Sense: Seller financing can widen the buyer pool and signal confidence in the business. It makes sense when you have a highly capable management team staying on board and trust the buyer to run the business well.
Trade-Off: You become a creditor with no control. If the buyer mismanages cash flow, you’re last in line to get paid. Enforcing your note can be costly — especially if the collateral is the business you just sold.
4. Escrows & Holdbacks
Definition: Buyers hold back a portion of the payout in escrow to cover surprises — like working capital adjustments, unpaid liabilities, or breaches of reps and warranties.
When It Makes Sense: Escrows are standard in most deals. They make sense when limited to a clear percentage, a well-defined time frame, and reasonable triggers that don’t bury you in unfair post-closing liability.
Trade-Off: Poorly defined escrows and holdbacks bleed your leverage and quietly shift liability back to you. Buyers can stretch out release, raise new “claims,” or threaten to withhold payout to renegotiate terms. A deal that looks clean on closing day can keep you entangled for years.
5. Contingent Payments
Definition: A special payout tied to a specific event — like winning a lawsuit, renewing a major contract, or securing regulatory approval.
When It Makes Sense: Contingent payments can be smart when there’s a clear, high-probability milestone with verifiable third-party evidence. They protect the buyer from an unknown — while giving you upside if it breaks your way.
Trade-Off: You carry risk for something you can’t fully control. Buyers may have little incentive to push hard for the milestone if they’d rather keep that money on their side.
6. Tax-Driven Structures
Definition: Buyers may push for structures like asset sales, 338(h)(10) elections, or F-reorganizations to step up the basis of your company’s assets — unlocking big tax deductions for themselves.
When It Makes Sense: Sometimes these elections can be win-win if paired with smart seller tax planning — for example, using an ESOP or a 1042 rollover to defer gains, or structuring the payout across tax years. Keeping legal continuity can also protect licenses, contracts, or key customer relationships.
Trade-Off: These structures save the buyer millions in future taxes by letting them write off the stepped-up asset basis — but they often stick you with a bigger tax bill today. A 338(h)(10) election is a classic example: the buyer treats it like an asset purchase for tax, getting big depreciation/amortization benefits, while you may owe higher ordinary income tax on asset recapture. If you don’t model the real after-tax proceeds, you’ll hand the buyer a windfall. True sell-side teams negotiate purchase price true-ups to offset that shift.
Bringing It All Together
“Don’t just chase the big number. It’s what you keep, when you keep it, and what strings are attached that decide your real outcome. Your deal will likely include some or several of these structural levers — and that’s okay. The point is to understand each one and how they interact to shape your risk profile and net proceeds. That’s what a true, unconflicted sell-side M&A firm does: they help you study every lever in isolation and together — so you can build the final structure that works for you, not for the buyer. Bottom line: you need these tools to create a peak outcome sale.
Preserve your legacy by securing the best price, terms, and steward of your employees and company.
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